It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Before you listen or read the next news report about Australia's balance of trade deficit, read this and be prepared:

Trade Deficits Don't Matter; Understanding Deficits Do

Donald Trump has demonstrated his profound misunderstanding of the basic economic principles of international trade for several years now, and perhaps reached a pinnacle when he told the New York Daily News in an interview last August that "we're getting hosed by the Chinese and that we've done it with our eyes wide shut." Here's more of Trump from that interview, further demonstrating his clueless and child-like misunderstanding of international trade:

"What China has done to America?" he raged. "The money and the jobs they've taken from us? It is the greatest single theft in the history of the United States." In other words, China is to the United States as Bernie Madoff is to investors. "And Japan is almost as bad," he stormed. "Japan sells us millions of cars and we sell them wheat!"

Economics is the core of human existence, it "concerns everything and everybody":

Ludwig von Mises said:

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence…All present-day political issues concern problems commonly called economic. All arguments advanced in contemporary discussion of social and public affairs deal with fundamental matters of…economics. Everybody’s mind is preoccupied with economic doctrines…Everybody thinks of economics whether he is aware of it or not. In joining a political party and in casting his ballot, the citizen implicitly takes a stand upon essential economic theories…As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake…all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty. Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.

Since at least Adam Smith, it is a well-known fact that free trade is one of the keys to prosperity. Yet the case for tariffs keeps coming back like a bad penny. In a few pages, Hazlitt provides a concise and yet comprehensive account of the detrimental effects of tariffs on real wages, consumers and productivity. According to Hazlitt, this fallacy stems from looking merely at the short-term benefits of tariffs for specific groups disregarding their long-term impact on the economy as a whole.

2. The Minimum Wage Fallacy

The myth that lower classes benefit from minimum wage laws is another belief firmly rooted in the collective imagination of the public. Nothing could be further from the truth. When the government passes a law forbidding employers from paying workers less than, say, $15 per hour, all workers whose marginal productivity doesn’t reach that number will be condemned to unemployment. As put by Hazlitt,

You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn.

3. Labor Unions Raise Wages and the Standard of Living

Another widely-spread fallacy has to do with the role of labor unions in determining real wages. According to the conventional view, labor unions play an essential role in settling the overall level of wages in an economy. In other words, most workers would be underpaid if unions didn’t exist. It is true that labor unions can push wages above productivity in a particular industry in the short term.

However, the increment in labor costs will be likely passed to consumers in the form of higher prices, which will end up reducing the volume of profits of the industry as a whole. This is turn will result in lower wages and, ultimately, unemployment. Thus, labor unions cannot affect the wage level in the long term. For Hazlitt, the fallacy resides in overlooking the only source of long-term increases in real wages: developments in labor productivity as a result of “the accumulation of capital and the enormous technological advance made possible by it.”

Cutting penalty rates across the country has failed to create any extra jobs or give workers more hours, new research has found.

In a blow to the Turnbull government's backing of the Fair Work Commission's decision to reduce penalty rates, a survey of 1351 workers by the University of Wollongong and Macquarie University found there has been no short-term increase in average weekly hours worked by employees.

Seriously though no one surely expected more jobs or hours to be created by removing penalties?
It does however mean the entrepreneurs who invest in having their own business keep more of their money. This is a good thing.

Cutting penalty rates across the country has failed to create any extra jobs or give workers more hours, new research has found.

In a blow to the Turnbull government's backing of the Fair Work Commission's decision to reduce penalty rates, a survey of 1351 workers by the University of Wollongong and Macquarie University found there has been no short-term increase in average weekly hours worked by employees.

I haven’t seen the FWC submissions so I’m not going to comment on the Business Council’s rationale regarding penalty rates. But...

Fallacy number 4: the goal of production is employment.

The goal of production is consumption ie to produce goods that are desired as cheaply and readily as possible whilst maximising resource utilisation. Jobs are a by-product if you like of the production process, they are an input, just like capital, land and resources. If the cost of production is lowered, consumers benefit by paying less for goods, the saving is then put toward satisfying other needs which enhances demand for other goods and demand for other jobs.

As the researchers suggested, it’s likely that job losses were a result of employees, mostly those under 35 leaving the industry (or voluntarily reducing their hours) and looking for work in other sectors that have better remuneration benefits. Which is actually the whole of idea of the free-market and no price (wages) controls in the first place. Work where the demand is and the pay reflects the value created.*

*Edit to add: getting paid more than $40/hour as a 20 year old simply for carrying plates of food around on a public holiday is a poor use of resources.

For the past four years workers across Australia have for the first time outside of a recession seen their living standards stagnate. Where once it was taken for granted that you would be better off now than you were in the past, the average Australian household has less disposable income in real terms than when the Liberal/National Coalition took power in 2013. And the major reason is persistent low wages growth.

In a period where the cost of living for essential items such as energy and health have skyrocketed, workers’ wages have grown at record low levels that would have been considered implausible five years ago. For workers – especially those on low incomes such as Margaret Peacock at the Australian Paper factory in Preston – even the average growth figures seem implausibly high as they struggle in an industrial relations environment where negotiating a pay rise large enough to cover increases in cost of living is viewed as a luxury.

What the split did do, however, was send wages growth downwards even while unemployment itself improved.

Profits are up, but wages are down
For many workers – including those like Margaret – the most exasperating thing about the lack of a wage rise is that the companies seem to be doing well.

Last year the sense that workers were losing out while companies profited reached a peak when company profits grew by 22% – the second fastest annual growth in the past 30 years, while total wages and salaries grew by just 1.4% – the slowest growth outside of a recession or the GFC.

Wages and salaries make up around 42% of Australia’s GDP, so when nominal GDP growth rises or falls, generally wages and salaries follow suit. But last year, yet again one of the wonderful long-held relationships in economic theory decided it was time for a trial separation:

Profits are up, but wages are down
For many workers – including those like Margaret – the most exasperating thing about the lack of a wage rise is that the companies seem to be doing well.

Last year the sense that workers were losing out while companies profited reached a peak when company profits grew by 22% – the second fastest annual growth in the past 30 years, while total wages and salaries grew by just 1.4% – the slowest growth outside of a recession or the GFC.

Wages and salaries make up around 42% of Australia’s GDP, so when nominal GDP growth rises or falls, generally wages and salaries follow suit. But last year, yet again one of the wonderful long-held relationships in economic theory decided it was time for a trial separation:

^^ Despite the increases in the real cost of wages over the last decade, businesses were able to absorb these costs thanks mainly in part to the mining boom which benefitted miners AND thousands of other business that serviced mining companies and their employees. In other words, from a consumer perspective real wages rose yet from a producer's perspective they remained about the same. Hence producers were able to afford to accommodate the increases in real wage due to increases in profits. So the real cost of consumer goods declined and prosperity was enhanced.

This situation has now reversed. Since about 2012, from a producer's perspective the real cost of wages has been steadily increasing, correspondingly from a consumer's perspective real wages have declined. In response to this increase in real wage costs and a decline in consumer demand, companies reduce their workforce and/or the labour hours required. Hence real wage growth stagnates.

So the moral of the story is that Australian workers have been lucky. For much of the past 2 decades our resources have been in demand by other nations, the world's 2 most populous countries have industrialised and introduced market reforms AND easy credit has been available meaning if you don't earn enough to buy a 65 inch flat screen you just borrow the money anyway. These factors have uniquely combined to help us forget how hard life can be sometimes. Especially when you view the world through the eyes of a folk economist.

As a side note, the Phillips Curve mentioned in the article of The Guardian is another example of folk economics. No surprise that The Guardian should rely on economic fallacies to make its point. And secondly, The Guardian cites a 22% increase in company profits for FY2016 ... without an explanation of whether that profit is pre-tax profit or not, which is pretty good seeing as they'd been stagnant for 8 years, despite increases in real wages. . Which makes a significant difference, in case you didn't know. Especially when you're selling newspapers.

Unlike most workers wages company profits fall and rise quite sharply. And, due to the beauty of denominators, a fall of 20% followed by a rise of 25% means that profits are simply back to where they originally were.

Dr. Richard Ebeling explains the ridiculousness of trade imbalance tariffs:
“So, suppose I pay $100 for my food from a grocery store, but they only buy $10 worth of economics lectures from me. I have a $90 trade deficit with that store. Clearly they are taking advantage of me.
Now I stop buying $90 worth of food from that store. Our trade balance now balances at reciprocal $10 of spending. Trade imbalance problem solved, the store is no longer taking advantage of me.
But now I’m short $90 worth of food to eat. No problem, I employ myself to grow and process food. But because I’m not as efficient as those from whom I buy the food through the grocery store, I must incur labor and other expenses for the same amount of food equal to $125.
Hooray! Look how much wealthier and better off I am now. That will teach that grocery store to only buy $10 worth of my economics lectures.”

The quote of the day comes from pages 476-477 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

At one time, it was believed that importing more than was exported impoverished a nation because the difference between import and exports had to be paid in gold, and the loss of gold was seen as a loss of national wealth. However, as early as 1776, Adam Smith’s classic The Wealth of Nations argued that the real wealth of a nation consists of its goods and services, not its gold supply.

Too many people have yet to grasp the full implications of that, even in the twenty-first century.* If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a “deficit” or a “surplus” in the international balance of trade.

The Melbourne Cup was an opportunity to briefly analyse the Trade Deficit Fallacy.

The winner, in this case a foreigner gets to take $4 million Australian out of the country as he "sold" a good here ie competed against others in a market. But he didn't purchase an equivalent (or higher priced) good from us. According to the disciples of The Church of The Trade Deficit Fallacy our economy should be $4 million worse off because we have given the owner of Cross Counter, Sheikh Mohammed bin Rashid Al Maktoum a swag of money without an equivalent trade deal in the form of an exchange in goods in return.

Naturally the disciples of The Church of The Trade Deficit Fallacy ignore the added value the Sheikh brings to the market in the form of employment and entertainment for both locals and those overseas and that $4 million for that added value obviously meets with the consent of most consumers of horse racing, for the return we get (value) must be greater otherwise the race would not stop a nation.

Even discounting "social values" surely Sheikh Mohammed bin Rashid Al Maktoum, his entourage plus all the other foreign horse syndicates, fees for races, renting stables and hotel for staff, travel (taxi etc) and other activity like eating at restaurants add up to off set the $4 million

@Ipv6Ready , it’s the value of unseen benefits that are the real measure of how trade enhanced our lives.

You place greater value being in the sweep than keeping your $1.

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It's unrelated to the racing economy. It's like a tax for compulsory camaraderie. There's always someone who takes up a "voluntary" collection with these sort of things, ignoring the glares of the misanthropes and animal lovers as they issue the challenge!